Identifying and gauging risks with post-investment disputes in China

Q: What are the typical post-investment disputes in China?

A: In our experience, post-investment disputes in China can be classified in the categories provided in the chart on the right.

Q: What are the reasons for disputes related to performance adjustment and redemption clauses, and how do you solve such disputes?

A: Disputes can arise with respect to the validity of performance adjustment and redemption clauses, and their implementation.

In the Haifu Investment case, the Supreme Court upheld the validity of the performance adjustment clause between founders and investors, but nevertheless invalidated the same clause between the invested company and investors by citing potential negative harm to the interest of other shareholders and creditors. In reality, performance adjustment may not be implemented due to founders’ lack of sufficient assets. If a founder is required to gift transfer certain shares to investors, such a change in equity interest could cause an unstable shareholding structure in the company and negatively affect its IPO. In an onshore investment structure, investors are typically required to waive or suspend their performance adjustment rights pending the company’s A-share IPO. If the IPO does not go through, it remains uncertain whether the investors’ performance adjustment rights can be restored.

Jeremy Dai and George Zhang are partners at AnJie Law Firm